Corporate insolvencies rise 27% – a looming zombie apocalypse?

Nicholas Hyett, Investment Manager at Wealth Club commented;

“The combination of higher interest rates and a slowing economy is taking its toll, with quarterly insolvencies nudging over 6,000 for the first time since the financial crisis. The only other time things have looked this bleak was during the early 90s recession.

The increased pressure doesn’t seem to have found its way into employment numbers yet, and the labour market remains strong, but we’d expect that to change in the months ahead. Unpleasant though it sounds that would be a relief for the Bank of England – which is looking to take some heat out of the economy. If economic data continues to weaken, then there’s a chance the Bank will declare an early victory in its battle with inflation, meaning rates peak at lower levels than anticipated and mortgage holders breathe a big sigh of relief.

In the long run, exactly what the current spate of insolvencies means for the UK economy is less clear.

Insolvencies and the accompanying job losses are never pleasant, but it’s just possible those companies falling to the economic pressure are companies the economy can afford to lose. There’s been much debate about zombie companies in recent years – businesses that are barely profitable, or heavily indebted that have managed to muddle through in a world where cheap bank loans were easily available. Those companies are likely to be early casualties of rising interest rates. However, if their demise frees up staff and properties for use by more profitable companies, the long run effect could be a boost to UK productivity.

Unfortunately, only time will tell whether the current spike in insolvencies is a zombie apocalypse or an apocalypse of the regular, more painful kind.”